This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
This report considers Challenger Banks in the UK Banking Market. Why are there Challengers, what need are
they fulfilling, who are they, How are they being financed, what is their strategy to grow market share and
can they be successful? Does their challenge offer opportunities for the Financial Services Entrepreneur?
How much money do you need to set up a Challenger Bank?
The objective is to give the reader an understanding of the UK Challenger Bank environment, providing
sources of information and links to further research and to highlight the Entrepreneurial opportunities
available.
There are many Fintech innovators working in the banking market value chain. In this report we are only considering those with full banking licences. Looking at core retail banking markets gives a macro analysis of where and in what configuration other Fintech Innovators can achieve traction.
London New Finance will produce separate research reports and showcase Fintech innovators in all of the sectors within the banking value chain during 2013 and 2014. If we have not included you in this report contact us and you will be profiled in later reports.
Notice to all users ...................................................................................................................................................................... 6
Entrepreneures Edition ‐ Section 1 only
1.0 Preface and Executive Summary ......................................................................................................................................... 7
1.2 What is a Challenger Bank? ............................................................................................................................................. 8
1.4 Who are the Challenger Banks? .................................................................................................................................... 10
1.4.3 Business ..................................................................................................................................................................... 10
1.4.2 Consumer and Business ............................................................................................................................................. 10
1.4.1 Who backs the Challenger Banks. .............................................................................................................................. 10
1.5 How do Challenger Banks Compete? ............................................................................................................................ 11
1.6 Are Challenger Banks real competition ......................................................................................................................... 12
1.7 Do the mutual’s offer any challenge? ............................................................................................................................ 14
1.7.2 Co‐op Bank ................................................................................................................................................................. 14
1.8 Government Policy and Regulation ‐ Challenger Banks ................................................................................................ 15
2.1 Preface to Section 2 and Section 3 ................................................................................................................................ 18
2.2 Aldermore Bank Plc ....................................................................................................................................................... 19
2.3 Burley Savings and Loans Ltd (Bank on Dave) ............................................................................................................... 20
2.4 Cambridgeshire & Counties Bank Ltd ............................................................................................................................ 21
2.5 Bank of London and Middle East BLME ........................................................................................................................ 22
2.6 Metro Bank Plc .............................................................................................................................................................. 23
2.7 Silicon Valley Bank ........................................................................................................................................................ 24
2.8 Secure Trust Bank .......................................................................................................................................................... 25
2.8 Shawbrook Bank ........................................................................................................................................................... 26
2.9 Wetherbys Private Bank ................................................................................................................................................ 27
3.1 Coop Bank and TSB (ex Lloyds) Project Verde .............................................................................................................. 27
3.3 Investec Bank ................................................................................................................................................................ 27
3.4 Marks & Spencer Bank .................................................................................................................................................. 27
3.5 Vanquis Bank ................................................................................................................................................................. 27
3.6 Virgin – Northern Rock .................................................................................................................................................. 27
3.7 Tesco Bank .................................................................................................................................................................... 27
3.9 United Bank UK ............................................................................................................................................................. 27
3.10 RBS Disposal of 318 Branches 1.8 million customers .................................................................................................. 27
4.0 PayPal, Internet & Mobile Banking models ....................................................................................................................... 27
4.1 Is PayPal a Bank? ........................................................................................................................................................... 27
4.2 Is PayPal a threat to existing banking models ............................................................................................................... 27
4.3 Other Potential Internet entrants ................................................................................................................................. 27
4.3.1 Google ........................................................................................................................................................................ 27
4.3.4 Mobile Banking ........................................................................................................................................................... 27
4.3.5 Apple .......................................................................................................................................................................... 27 6.0 The Competitive Environment ‐ Whatever Happened to .................................................................................................. 28
6.1 IF Bank ........................................................................................................................................................................... 28
6.2 Egg Bank ........................................................................................................................................................................ 28
6.3 Standard Life Bank ........................................................................................................................................................ 28
6.4 ING Direct ...................................................................................................................................................................... 28
6.5 First Direct Bank ............................................................................................................................................................ 28
6.6 Smile (CoOp internet Bank) ........................................................................................................................................... 28
Appendix 1 – European Bank Federation International Comparison ....................................................................................... 29
Appendix 2 – Events that have eroded consumer confidence in the UK Financial Services Industry ...................................... 30
Appendix 3 – Competitiveness of Challenger Banks by Market Segment ............................................................................... 31
Appendix 4 Challenger Banks Basis of Competition ................................................................................................................. 32
Appendix 5 – Share of PCA Current Account and Savings Market ........................................................................................... 33
Legal Disclaimer IC Dowson and William Garrity Associates Ltd, Eddie George and London New Finance a trade name of Eddie George Ltd
(the Authors) make no assertion to the correctness, validity or usability of any of the information or comments in this
document. The “Authors” responsibility for any third party references made from this document; any third party source
should be checked by and validated by any user of this document who should make their own considered assessment. Any
user of this document does so at his or her own risk and assumes full liability thereof for any decisions made upon the basis
of any information included in this document in whatever legal jurisdictions. In any event “the authors” accept no legal
liability to any third party, or duty or implied duty of care in any manner whatsoever unless a specific signed contract
exists. By using this document any third party agrees to these conditions. This document has been written for academic
and theoretical debate purposes only. Any third party using this document agrees to these conditions and will not use any
information extracted from this document which numbers pages 1 to 17 without expressly communicating these
conditions to any other person. Under no circumstances will the user of this report use any the information contained
within to specifically identify any specific individual and will not use any of the information contained within this report to
generate email lists “Spam” or any other automatic mail email generating system. All users of this confirm that information
contained within this report shall be stored and used in accordance with the data protection act 1998.
If any reader of this report is considering any form of investment he or she should not rely on any of the information
contained in this report, it has been written for academic and theoretical purposes only. Any person or organisation
considering investment should seek advice from a FSA* (Financial Services Authority) approved professional financial
investment adviser and conduct in depth independent diligence. Nothing contained in this report, or third party references
constitutes investment advice or any incentive or inducement to invest in the Fintech asset class. Investment in this asset
class is only suitable for professional or high net worth investors as determined by the FSA. Investment in Fintech
companies is very high risk and in the majority of cases results in complete loss of capital and should only be undertaken by
Professional investors as defined by the FSA who take extreme care in diligence and have made the appropriate risk
assessments required by the FSA and have had advice from a professional FSA qualified investment adviser. For the vast
majority of investors this asset class contains too much risk, you will lose all of your capital invested, do not invest in this
asset class. Please speak to your Accountant, Lawyer, Stockbroker or other FSA qualified adviser. “The authors” are not FSA
registered financial advisers and do not hold themselves to be so. For any forward‐looking statements contained in this
document, “The Authors” claim the protection of the safe harbour for forward‐looking statements contained in the Private
Securities Litigation Reform Act of 1995. * FSA and successor organisations FPA (Financial Policy Committee) and PRA
(Prudential Regulation Authority)
Copyright
Copyright is claimed under UK and international copyright law by IC Dowson and William Garrity Associates Ltd, Eddie
George and London New Finance a trade name of Eddie George Ltd (the Authors)
The copyright rights claimed are modified in this document by the Creative Commons Attribution‐NonCommercial ‐
NoDerivs 2.0 UK: England & Wales License
Attribution — you must give the original author credit. Non‐Commercial — you may not use this work for commercial purposes. No Derivative Works — you may not alter, transform, or build upon this work. With the understanding Waiver — any of the above conditions can be waived if you get permission from the copyright holder. Public Domain — where the work or any of its elements is in the public domain under applicable law, that status is in no
way affected by the license.
Other Rights — in no way are any of the following rights affected by the license:
Your fair dealing or fair use rights, or other applicable copyright exceptions and limitations;
The author's moral rights;
Rights other persons may have either in the work itself or in how the work is used, such as publicity or privacy rights.
Notice — for any reuse or distribution, you must make clear to others the licence terms of this work.
Copyright ‐ Rights Holders the copyright of any material used from public domain sources is acknowledged and remains
the property of the copyright holder; all trademarks are the property of the trade mark owner and are acknowledged.
By using this document numbered pages 1‐17 any third party automatically agrees to these conditions.
Concentration: top 5 banks’ assets as % of total bank assetsTop 5 banks’ assets, % of GDP
1.0 Preface and Executive Summary
The United Kingdom has one of the most
concentrated banking systems in the world,
its top five Banks1 dominate banking assets.
A Treasury select committee report2
concluded in 2011 the top five UK banks had
85% of the Personal Account market and the
top 4 banks had 80% of the SME liquidity
market. This syndrome of concentration has
been called “Too big (important) to fail, Too
big to compete against”3 This structure of
Banking concentration is propped up by
implicit Government guarantees that act as a
highly effective barrier to entry. Failed or
uncompetitive Banks do not exit the market
and create space for innovation and new competitors, the Big 5 Banks score lower than average
customer satisfaction levels than peers see Appendix 6.
In contrast the USA has a tried and tested Banking
failure and entry method via FDIC (Federal Deposit
Insurance Commission) over the past 5 years, 465
institutions have failed covering $492.8bn in deposits.
In the 5 years prior to the banking crash in 2008, 840
new bank charters were granted.
The significance of a concentrated banking sector was
magnified by the banking crash. The UK Government
had a maximum commitment of a £1Trillion4 . Since the
banking crash it has had great difficulty in restarting
lending to SME’s, and consumers, through Project
Merlin, Quantitative Easing, National Loan Guarantee
Scheme5, Business Finance Partnership, and now
Funding for Lending6 this has further exacerbated Government frustrations with the banking and
financial services industry.
The UK fiscal and regulatory environment has undergone a sea change. The political class, Treasury
and Bank of England are now determined that the United Kingdom’s finances are never threatened
again by a “Too big to fail” induced banking crash. This new regime starts with the formation of the
Financial Conduct Authority on the 1st April 2013. It is into this banking environment that Challenger
banks are now emerging as stronger competitors, the opportunities for meaningful market share
growth are more favourable than for generations.
1 Barclays Bank Plc, HSBC, Lloyds Banking Group, RBS, Santander 2 House of Commons Treasury Committee, Competition and Choice in Retail Banking, HC 612‐1 April 2011 http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/612/612i.pdf 3 P79 House of Commons Treasury Committee, Competition and Choice in Retail Banking, HC 612‐1 April 2011 4 National Audit Office Maintaining the financial stability of UK banks: Update on the support schemes
http://www.nao.org.uk/publications/1011/support_for_banks.aspx 15 December 2010 5 http://www.hm‐treasury.gov.uk/fin_sector_banking_business_lending.htm, http://www.hm‐treasury.gov.uk/d/bank_agreement_090211.pdf 6 http://www.hm‐treasury.gov.uk/ukecon_fundingforlending_index.htm
Backed Challenger Banks use innovation, product portfolio and customer service as differentiation,
this is added to scale, an existing brand and branch network. They in many respects follow the
banking models of the “big 5 Banks” (Barclays, HSBC, Lloyds HBOS TSB, RBS and Santander) but aim
to operate this kind of model more effectively or segment markets better than competition. The Co‐
op Bank being a mutual ploughs a different strategy to the other backed challengers.
Further competition may come from the internet giants, but apart from PayPal with a Luxembourg
banking licence this is a very prescient sector. Other internet banking models with full banking
licences are operating and about to operate in the USA and Germany but lack scale and market
share.
Innovation and challenge was introduced into the banking sector over the past 20 years based on
telephone and then internet banking. What has happened to this innovation, it is not without its
casualties.
1.2 What is a Challenger Bank?
An organisation with a full banking licence issued by the FSA (Financial Services Authority or
overseas equivalent) that takes deposits, makes loans and provides a range of financial services and
has Government backed deposit insurance in case of default. In our analysis we have included one
exception “Bank on Dave” it’s an example of a retail peer to peer lending model.
In the UK FSCS7 The Financial Services Compensation Scheme normally £85,000 the
register of institutions is here The EEA European Economic Area has a compensation
limit per account of Euro 100,000. Important see note 8
In the USA FDIC8 Federal Deposit Insurance Commission compensation limit
normally $250,000. Important See note 9
7 http://www.fscs.org.uk/what‐we‐cover/products/banks‐building‐societies/ 8 http://www.fdic.gov/consumers/banking/facts/index.html 9 Note: The compensation/guarantee figures illustrated are for guideline only, these schemes need very careful study when considering
investment and banking products they may not apply, please consult your FSA registered Independent Financial Advisor for further
consumer fear factor in switching. Big 5 banks lack of lending capacity (ex Government schemes)
they also need to rebuild their balance sheets through profit to meet Basel III, the determination of
the UK Government to tackle the “Too Big to Fail” banking concentration problem.
One of the most corrosive banking brand erosion actions has been the large volume of TV
advertising effort by PPI (Personal Protection Insurance) claims companies. PPI compensation has
reached a massive £12bn.
1.4 Who are the Challenger Banks?
1.4.1 Consumer Secure Trust Bank Virgin Money – Northern Rock Tesco Bank Sainsbury’s Bank Marks & Spencer Bank Vanquis Bank, Burnley Savings and Loans*
1.4.3 Business SVB – Silicon Valley Bank Cambridgeshire and Counties United Bank Plc (Islamic)
1.4.2 Consumer and Business Metro Bank Aldermore Shawbrook Bank Handlesbanken UK Co op Bank RBS Disposal of 316 Branches
1.4.4 Wealth Management Weatherbys Bank
*Not a Bank but a High Street based P2P lender
1.4.1 Who backs the Challenger Banks.
10 of the Challenger Banks are independent, 9 of them are backed by host organisations
Bank Backer Bank Backer 2.1 Aldermore 2.2 Burley Loan and Savings (Bank on Dave) 2.3 Cambridgeshire & Counties Bank 2.4 Bank of London and Middle East BLME 2.5 Metro 2.6 Silicon Valley Bank 2.7 Secure Trust Bank 2.8 Shawbrook Bank 2.9 Weatherbys Private Bank
AnaCap Financial Partners LLP, Morgan Stanley Alternative Investment Partners David Fishwick Entrepreneur Trinity Hall Cambridge and Cambridgeshire County Council Pension Fund Middle Eastern Investment Group Fidelity, Rueben Bros, Veron Hill, Richard Le Frank NASDAQ MK Cap $3bn LSE Listed Mk Cap $414m 70% Arbuthnot Banking Group Plc RBS Equity Finance/ Laidlaw Acquisitions Ltd Weatherby Family and Family Trusts
3.1CoOp Bank – TSB (ex Lloyds) Project Verde 3.2 HandlesBanken 3.3 Investec Bank 3.4 Marks & Spencer Bank 3.5 Vanquis Bank 3.6 Virgin – Northern Rock 3.7 Tesco Bank 3.8 Sainsbury Bank 3.9 United Bank UK 3.10 RBS Disposal of 318 Branches 1.8 million customers
Co‐operative Society‐ Mutual Skenska Handlesbanken AB Mk Cap $26bn Investec Plc Mk Cap $4.5bn 100% Owned by HSBC, name licensed from M&S. Provident Financial Plc Mk Cap $3.2bn Wilbur Ross Tesco Plc J Sainsbury Plc 50% Lloyds Banking Group 50% 45% National Bank of Pakistan
Challenger banks are a competitive threat to the Big 5 banking companies. But in market share terms
they operate in the margin aiming at specific market segments. That does not mean they cannot
become large successful businesses earning in excess of £100m profit pa, Tesco Bank made £168m in
2011‐2012. The competitive environment is good and the regulatory framework is set towards more
competition, core customers, particularly in the SME Banking sector desperately seek alternatives.
The real challenge to the dominance of the Big 5 banks will come from industry restructuring
implemented by the political process and competition authorities, discussed in section 1.8. This will
allow easier entry and exit to the industry, opening up of payment systems, more effective account
switching systems and an equal playing field for regulated capital requirements, that does not
discriminate against smaller Banks.
11 P41 OFT /1005rev Review of the Personal Current Account Market Jan 2013
http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005rev 12 P16 House of Commons, Treasury Committee Competition and choice in retail banking
1.8 Government Policy and Regulation ‐ Challenger Banks
Fundamental changes in Government policy and regulatory structures are underway. These will have
profound impacts on the capacity of the Challenger banks to compete and will change the structure
of Banking industry in the UK.
The impetus of Government reform has been building since 2000 when the Cruikshank report 17concluded there was a poor competitive environment in UK Banking; its conclusions were ignored
by Gordon Brown. Since then we have had OFT Reports on Bank overdraft mischarging and the PCA
market, the financial crash with a Government funded rescue, a series of financial scandals,
(Appendix 2) the inability of the Government to implement fiscal and monetary policy through the
banking system post‐crash otherwise liquidity support for SME’s.
The actions being taken:
Abolition of the FSA into three constituent parts: Bank of England, Financial Conduct
21 July 2008, http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf January 2013,
http://www.oft.gov.uk/OFTwork/markets‐work/othermarketswork/pca‐review/#.UR0OJx1WFlk, Jan 2013 report http://www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005rev
The competitive environment for Challenger Banks is about to change in their favour.
Government and Regulators are now orientated towards competition and innovation.
The Big 5 Banks lending capacity will be constrained for the next 5 years at least by structural change as a result of Banking Commission, Basel III and he actions of the new Regulators.
Technology, consumer behaviour and FinTech Innovation is poised to change retail banking in as profound a manner as online retailing.
Opportunities
Build a mobile Challenger Bank. You are not going to be turned away by HM Treasury, Bank of England or the Regulator, if you have a proven professional management team, financed by reputable backers, a viable business plan, prudent risk control strategies, effective and secure ICT systems, you will be issued with a Banking licence.
The Challenger Bank Sector is already a large and vibrant sector. There is a technology and process supply opportunity for all FinTech Entrepreneurs into each of these institutions. All of them are still in an early emergent phase of repositioning their institutions towards the mobile banking revolution. They do not have in‐house FinTech innovation capacity.
Challenger Banks operate in specific market segments or have an aspect of a valve chain that gives them competitive advantage. FinTech entrepreneurs should focus their product and market mix offerings to align challenger bank strategies to facilitate joint ventures and alliances.
Licence your business model or technology, Challenger Banks need these if they are to compete.
Build your FinTech business up to positive revenue earning levels and sell it to a Challenger Bank.
The Coop Bank is a supply opportunity; they are going to need to purchase a lot of innovation post integration of the Lloyds TSB branches and subsequent repositioning their new Bank.
Provide SAAS/ FinTech cloud solutions aimed at the Challenger banks aimed at part of their value chain.
The UK Payments system, BACS, Payments Council, Faster Pay is about to be opened up, study the changes carefully and position your FinTech business to benefit from this change.
There are some interesting supply niche supply opportunities, e.g. using FinTech to market ethical/moral banking and service differentiation. The mutual sector is weak at communicating their message and financial propositions. Use distinctive FinTech to market wealth management services.
Two of the Challenger Banks have part of their focus on Islamic banking markets. FinTech in Middle Eastern Islamic banking markets is embryonic with maybe 6 text based mobile phone banking systems. Using a UK based challenger bank to developing your Islamic Banking FinTech proposition would open up a vast underdeveloped market.